Operations Management & Performance Modeling
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Operations Strategy
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–
Class 1a: Introduction to OM
Class 1b: Strategic Operational Audits
2 Process Analysis
–
Class 2a + 2b: Process Flow Analysis
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CRU Computer Rentals presentation
Detailed Capacity Analysis: Kristen’s Cookies
Key levers for improving process capacity and flow time
Lean Operations
Supply Chain Management
Capacity Management in Services
Total Quality Management
Business Process Reengineering
OM&PM/Class 2b
1
CRU Computer Rentals:
Revenue and Cost Drivers
Status 40
Ship
Receiving
30%
Repairs
70%
R
Status 24
Customer
Ic
15%
Status 41
Pre-Config
R2
R1
Parts
places
order
Receives
from
Supplier
Status 32
Ship
Config
Repairs
Status 20
OM&PM/Class 2b
Status 42
2
Kristen’s Cookies: Flow Chart
Take
Order
Order
Ready
Wash
& Mix
Spoon
Load &
Set Timer
You
You
Roommate, Oven
6min / 1-3doz
2min / doz
1 min / doz
Pay
Pack
Cool
Unload
Roommate
1 min / order
Roommate
2 min /doz
---
Roommate
OM&PM/Class 2b
Bake
Oven
9 min/doz
5 min
3
Process Architecture is defined and
represented by a process flow chart:
Process = network of activities performed by resources
1. Process Boundaries:
– input
– output
2. Flow unit: the unit of analysis
3. Network of Activities & Storage/Buffers
– activities with activity times
– routes: precedence relationships (solid lines)
4. Resources & Allocation
5. Information Structure & flow (dashed lines)
OM&PM/Class 2b
4
Operational Measure: Flow Time
Driver: Activity Times
 (Theoretical)
Flow Time

Critical Activity

Flow Time efficiency
OM&PM/Class 2b
5
Levers for Reducing Flow Time

Decrease the work content of critical activities
– work smarter
– work faster
– do it right the first time
– change product mix

Move work content from critical to non-critical activities
– to non-critical path or to ``outer loop’’

Reduce waiting time.
OM&PM/Class 2b
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Most time inefficiency comes from waiting:
E.g.: Flow Times in White Collar Processes
Industry
Process
Average
Flow Time
Theoretical
Flow Time
Flow Time
Efficiency
Life Insurance
New Policy
Application
72 hrs.
7 min.
0.16%
Consumer
Packaging
New Graphic
Design
18 days
2 hrs.
0.14%
Commercial Bank
Consumer
Loan
24 hrs.
34 min.
2.36%
Hospital
Patient Billing
10 days
3 hrs.
3.75%
Automobile
Manufacture
Financial
Closing
11 days
5 hrs
5.60%
OM&PM/Class 2b
7
Operational Measure: Capacity
Drivers: Resource Loads
 (Theoretical)
Capacity of a Resource

Bottleneck Resource

(Theoretical) Capacity of the Process

Capacity Utilization of a Resource/Process =
throughput [units/hr]
capacity [units/hr]
OM&PM/Class 2b
8
A Recipe for Capacity Measurements
Resource Unit Load
Resource Capacity
(time/job) Unit Capacity # of units Total
Process Resource
Capacity Utilization*
* assuming system is processing at full capacity
OM&PM/Class 2b
9
Cost Capacity Profile
Demand
Capacity
[units/time]
Process Capacity
Resource x
NCX-10
Furnaces
OM&PM/Class 2b
Marginal Investment Cost
[$/unit/time]
10
Levers for Increasing Process Capacity

Decrease the work content of bottleneck activities
–
–
–
–

work smarter
work faster
do it right the first time
change product mix
Move work content from bottlenecks to non-bottlenecks
– to non-critical resource or to third party

Increase Net Availability
–
–
–
–
work longer
increase scale (invest)
increase size of load batches
eliminate availability waste
OM&PM/Class 2b
11
Increasing Process Capacity in The Goal
 “is
to increase the capacity of only the bottlenecks”
– “ensure the bottlenecks’ time is not wasted”
» increase availability of bottleneck resources
» eliminate non-value added work from bottlenecks

reduce/eliminate setups and changeovers
» synchronize flows to & from bottleneck

– “
reduce starvation & blockage
the load of the bottlenecks (give it to non-bottlenecks)”
» move work from bottlenecks to non-bottlenecks
» need resource flexibility
–
unit capacity and/or
» invest
#of units.
OM&PM/Class 2b
12
Pricing and Capacity Investment:
Trays + Rent another oven at $10/hr?

Resource cost =

Material cost =

Minimum sale price =

Contribution margin if sale price is $5 / dozen =
OM&PM/Class 2b
13
Other factors affecting Process Capacity

Batch (Order) Sizes

Product Mix
 other
managerial policies ...
OM&PM/Class 2b
14
Chocolate Chip and Peanut Butter Data
Flavor
Clean
Spoon on Load and Bake
Bowl and Tray
Set Oven
Mix
Cool
Pack
Into Box
Receive
Payment
Chocolate 6 min
Chip
2 min /
doz
1 min
9 min
5 min
2 min /
doz
1 min
Peanut
Butter
2 min /
doz
1 min
7 min
3 min
2 min /
doz
1 min
9 min
OM&PM/Class 2b
15
Class 2b Learning Objectives
CRU: manage better with the three key operational
measures and an inter-functional macro process view
of the organization
 Process measures:

– Flow time  manage critical activities
– Capacity  manage bottleneck resources

Levers for improving
– Flow time  manage critical activities
– Capacity & Throughput

Process capacity depends on a zillion things
OM&PM/Class 2b
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